Death of a phone tax brings small refund

Overturned excise tax on long-distance calls means refund next year

SAN FRANCISCO (MarketWatch) -- It's only enough for a nice dinner out, or a very small slice off your tax bill, but next year you'll get up to $60 back on your taxes, thanks to the telephone-tax refund.

Consumers can collect a $30 to $60 refund (depending on how many exemptions they claim) by simply filling in a line on their tax form in 2006, the IRS announced Thursday.

The refund is a one-time payment to reimburse consumers for the federal excise tax on long-distance calls. The U.S. Treasury said in May it would stop collecting the 3% federal excise tax on long-distance calls, a fee originally assessed in 1898.

The government said that it would issue refunds requested by consumers and businesses that paid the long-distance tax over the past three years. Now, the IRS has devised a formula to make it easy for consumers to claim their refund: All you need to know is how many exemptions you're claiming on your 2006 return.

The standard amounts are $30 for a person filing a return with one exemption, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions, the IRS said.

"For myself, because I'm married with two children, I would qualify for the $60," said John W. Roth, a senior tax analyst with CCH Inc., a Riverwoods, Ill., tax publisher.

"For the poor guy who just finished putting his two children through college, who are now independent this year, he's down to two exemptions: He's only going to get $40. He's probably going to be a little miffed," he said.

Here's how the IRS explained its method for figuring the refund amounts: "The standard amounts are based on actual telephone usage data, and the standard amount applicable to a family or other household reflects the long-distance phone tax paid by similarly sized families or households," the agency said in the statement.

Taxpayers who paid the long-distance tax on service billed after Feb. 28, 2003 and before Aug. 1, 2006 are eligible, the IRS said.

Taxpayers who don't want to use the standard refund amounts and instead want to figure their refund based on the actual excise tax they paid will have to gather their telephone records for that period. Feb. 28, 2003 is the date the lawsuit challenging the long-distance tax was filed, Roth said.

"The easiest way for eligible taxpayers to get their money back is to use the standard amounts," said Mark W. Everson, the IRS commissioner, in the statement Thursday. "These amounts save taxpayers from locating 41 months of old phone bills and analyzing these bills to determine the taxes paid. We believe the standard amounts are both reasonable and fair."

Still, several lawsuits have been filed contesting the refund, and one challenges the IRS' method for figuring the refund amounts, Roth said.

The lawsuits are "all asking for temporary injunctions to prevent this from happening because they feel it's unfair. [Some feel] the safe harbor is a gross underestimation and the IRS needs to figure out a better way," Roth said. "All these arguments are being put forth. They don't feel the full $13 billion will be refunded ... One of the biggest complaints is who's going to have their bills back to 2003?"

The standard refund amounts are available only to individual taxpayers, the IRS said. Business-owners seeking the refund will need to come up with those records of their paid bills. That means "a sole proprietor who has a telephone line under his business name is going to have to, hopefully, have his bills," Roth said.

Still, the IRS said it will offer a method for figuring a best estimate of long-distance charges paid.

"Businesses and nonprofits generally have more varied usage patterns than individuals do," Everson said in the statement.

"We've met with a number of business and nonprofit groups to understand their concerns, and we plan to continue to work with them to come up with a reasonable method for estimating telephone excise tax refund amounts," Everson said.

For those who don't have to file taxes, such as those with a low taxable income, the IRS is creating a special form for claiming the excise-tax refund: Form 1040-EZ-T.

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